I get to know dozens of the non-governmental groups trying to help America's disadvantaged in my role at the Manhattan Institute's "social entrepreneurship" award program. And it keeps me wondering about what really works – what philanthropy does well, what government does well and what our "social policy" should be. As a lapsed liberal still worried about how to help (I might say uplift) the poor, a key point for me was writing, in City Journal, about my father's childhood: “How the Agency Saved My Father” (http://www.city-journal.org/html/9_2_how_the_agency.html).
Professionally, I’m vice president for policy research at the Manhattan Institute, and also director of our Social Entrepreneurship Initiative. My latest book, Philanthropy Under Fire, will be published in September, by Encounter Press. In addition, I’m a City Journal contributing editor. From 1987 through 2006, I served as director of case studies in public policy and management at the Harvard Kennedy School of Government, where I was also a fellow at the Hauser Center on Nonprofit Organizations. My writing on the nonprofit sector has appeared in The Wall Street Journal, National Affairs, Society Magazine, The Chronicle of Philanthropy and The Public Interest. I’ve also written widely on housing policy, including in my book The Trillion-Dollar Housing Mistake: The Failure of American Housing Policy (Ivan R. Dee, 2003), and the monograph Repairing the Ladder: Toward a New Housing Policy Paradigm (Reason Foundation, 1996. My previous lives include one as a documentary filmmaker at WGBH-TV in Boston, where my work won three Emmy awards.

The White House is certainly right that the small minority of Americans who itemize their tax returns can take advantage of such deductions. But he is profoundly wrong to conflate the deduction for mortgage interest with that for charity. In doing so, the President, in an apparent zeal to increase taxes on the wealthy at all costs, sees no difference between one deduction (mortgage interest) that distorts our housing market and favors the interest of specific interests (such as homebuilders), and another which provides revenue for organizations ranging from homeless shelters to universities. Or, put more simply, the White House mistakes a policy which allows someone to help himself to a bigger house with one which provides a modest incentive for helping others. It’s a mistake so basic that it reminds one of the famous Oliver Sacks book, “The Man Who Mistook his Wife for a Hat”.

Indeed, those who are generous with their charitable donations should certainly not feel they must defend both deductions. To understand why, it’s important to understand what’s right about the charitable deduction—but, also, what makes the mortgage interest deduction not worth defending.

Form 1040 (Photo credit: Philip Taylor PT)

The White House is, in fact, right to seek to cap its value further (it already applies only to interest on mortgages larger than $1.1 million)—and would be even better advised to limit it further still (as per Rep. Dave Camp’s tax reform proposal, to limits its application to mortgages only up to $500,000). The President should do so because he is, indeed, right that the deduction provides private benefits for the wealthy—but little public benefit. Long inviolate because of its supposed value in promoting homeownership, there is little evidence that it does so. Not only do other nations, such as Canada, which lack such a tax code provision enjoy home-ownership rates similar to those in the U.S., but, as economists Ed Glaeser and Jesse Shapiro have written, “the home mortgage interest deduction is a particularly poor instrument for encouraging homeownership since it is targeted at the wealthy, who are almost always homeowners.” In other words, helping the wealthy to buy a McMansion really isn’t good public policy. Meanwhile, the only time in recent decades when the homeownership rate increased significantly occurred in the run-up to the financial crisis—when too many who could not afford a home at all (and likely did not itemize their taxes) were drawn into homeownership. To make matters worse, the existence of the mortgage interest deduction gives fodder to those who argue that direct housing subsidies for the poor should be further increased—even though housing vouchers, as I’ve written in City Journal, include none of the encouragement for work and upward mobility that reformed cash welfare has provided since 1996.

All this stands in sharp contrast with the charitable contributions made by the same wealthy who might avail themselves of the mortgage interest deduction. Their contributions to the $217 billion in household charitable giving are significant; indeed, only 21 percent of the value of charitable gifts comes from donations of those who do not itemize their tax returns. And, as Williams College economist Jon Bakija has noted, households with income above $200,000 themselves account for 29.5 percent of the aggregate value of all charitable donations. That’s why the current White House proposal to cap the value of the charitable deduction would, as the American Enterprise Institute’s Arthur Brooks has found, likely lead to a substantial drop in overall giving—a drop of up to $9.4 billion. Such a drop would, as I wrote for the Manhattan Institute, be disproportionately concentrated in high-tax “blue” states, where there are so many high-income households with high tax bills.

It’s important to keep in mind, what’s more, where the billions contributed by the wealthy to charity actually go. A 2012 Bank of American/Indiana University study of “high net worth philanthropy” found that 79.6 percent of high net worth donors support education; 79.3 percent support “basic needs” for the poor (think food pantries); 68.8 percent support the arts; and 65.5 percent support health organizations (think both cancer research and local hospitals). Certainly such donors derive some modest personal benefits from such giving—perhaps a plaque at their alma mater, or the social status that comes with being on the board at the art museum. But that’s simply not the same as a subsidy which helps one buy a bigger house on a bigger lot—and it’s hard to believe the White House can’t tell the difference.

A serious Obama Administration would be endorsing proposals, such as that of Rep. Camp to limit the mortgage interest deduction, or that of the Congressional Budget Office to convert it to a tax credit, so as to extend its benefits to a broader economic cross-section of Americans. It would not use the flaws of the mortgage interest deduction to take a cheap shot at philanthropy.

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